Microsoft's Future Barely Limited

By JOHN MARKOFF,

Published: July 18, 1994

SAN FRANCISCO, June 17—
Rather than reining in the Microsoft Corporation, the consent decree that the Justice Department announced over the weekend with Microsoft, the world's largest software publisher, frees the company to define the computer industry's ground rules through the rest of the decade.

The agreement leaves untouched what many computer industry executives say is Microsoft's principal advantage -- that it develops both the basic operating-system software that makes personal computers run, known as MS-DOS, and applications software, like word-processing programs or spreadsheets, that perform specific tasks.

"Microsoft's whole empire is based on the interlocking nature of their operating-system and application software," said William Joy, a founder of Sun Microsystems, and the author of one version of the Unix operating system. Not a Central Issue

Microsoft officials said Saturday that issues related to the relationship of their operating software and their applications programs had not been a focus of their recent negotiations with Justice Department officials.

MS-DOS and the Windows program, which makes DOS easier to use, are installed in millions of computers worldwide. While the Justice Department has decided that Microsoft does have a monopoly in operating systems, it insists that the licensing changes the consent decree spells out provide a remedy.

Yet many Microsoft competitors see a broader problem, as well: the line between where the operating system ends and the applications programs start is increasingly being blurred by advances in technology.

Smaller competitors with innovative ideas in businesses as diverse as electronic mail ; file compression, which creates more storage space on a disk, and screen savers, which prevent damage to monitors, are finding that their business is evaporating because Microsoft keeps adding such programs to its operating system as it periodically brings out an updated version.

A Microsoft's operating system scheduled for release next year, called Chicago, will accelerate the process. The program will merge DOS and Windows and will include electronic mail, remote access, file-searching functions and screen savers.

Since introducing MS-DOS in 1981, Microsoft has continually campaigned to expand the definition of what computing functions belong inside the computer operating system. The early versions of DOS were small programs that did little more than control the storage and retrieval of data and start and stop applications programs. But in the 14 years that followed, Microsoft's operating systems have greatly expanded the services they provide to users and programmers.

The other important issue not specifically addressed in the consent decree is whether Microsoft has been able to leverage its virtual monopoly in operating systems into domination of applications software -- a far bigger and more lucrative market.

This matter is of great concern to companies like Lotus Development, Borland International and Novell, and its recently acquired Wordperfect -- which specialize in applications software. About half of the 50 million computers that run Windows, for example, use Microsoft's word processor, called Word, and its spreadsheet, Excel.

It was for that reason that lawyers at the Federal Trade Commission toyed two years ago with the idea of breaking Microsoft into two companies. More recently, Justice Department investigators are believed to have studied ways of creating some sort of "Chinese wall" that might limit the information traveling between the two sides of the business.

Anne K. Bingaman, Assistant Attorney General in charge of antitrust matters, refused to comment on the issue. But in response to a question whether the department had considered trying to split Microsoft, she said Saturday that her lawyers had looked at "every possible legal theory." Linkage Is Soft-Pedaled

In an interview today, Ms. Bingaman acknowledged that the decree was silent about any linkage between Microsoft's power in operating systems and its growth in applications software. But she also said the Justice Department had decided against pursuing a "second range of issues" that had been raised by the F.T.C.'s earlier investigation.

"All I can tell you is we filed the complaint based on what we decided were the problems that needed to be corrected," she said.

What the consent decree announced on Saturday did achieve was this: Microsoft agreed to change the way it deals with the companies that make the hardware for personal computers, freeing them to offer customers a choice of operating systems. Microsoft will also alter its software-licensing policies and the way it gives information to software developers.

The expectation is that personal computer makers like Compaq, Dell and others will now be more receptive to the operating systems made by Novell, International Business Machines and Sun Microsystems.

Software companies will be able to develop versions of their programs for Microsoft's operating systems without making exclusive commitments to Microsoft, leaving them free to create applications for operating systems that other companies have designed.

Yet while the consensus is that Microsoft's influence will continue to increase, computer industry executives are divided over whether its power and influence will be good or bad for consumers.

"Microsoft has become the I.B.M. of the 1990's," said J. Paul Grayson, chairman and chief executive of Micrografx, a software publisher in Richardson, Tex. "There are issues for anyone who wants to participate in this market because of their size and scope. Anything the Government does to slow them down would be welcome." Believes Bigger Is Better

But others in the industry believe that Microsoft's strategy is benefiting consumers.

"If you really care about improving the personal computer, you want Microsoft to take over all the pieces of the pie," said Stewart Alsop, editor of Infoworld, a weekly computer-industry newspaper.

Competitors like Novell, which were otherwise pleased by the agreement obtained by the Justice Department, said they were disappointed that the Government had not forced Microsoft to disclose information about new versions of its operating systems in ways that would level the playing field for developers who are competing with Microsoft applications.

The company's competitors have argued that Microsoft has gained a special advantage for its applications programs by using hidden operating-system features and providing earlier access to technical information for its programmers.

Microsoft officials said the Government had found no evidence that such a special advantage existed. "We don't think this is market power in the traditional antitrust sense," said William H. Neukom, the company's vice president for law and corporate affairs. "Anyone can come in and upset you with better technology. We think it's a ferociously competitive business."

While the agreement may aid some companies like Novell, which makes a Microsoft-compatible operating system, it will not affect Microsoft's power with respect to smaller software developers.

"Microsoft will continue to be very powerful," said Martin Goetz, a co-founder of Applied Data Research, the nation's first software company. "The Justice Department hasn't listened to the cries of the software companies."